A good charity budget is much more than an annual income and expenditure forecast. Done well, it connects strategy, activities, funding, cash and reserves, giving finance managers and trustees a practical framework for deciding how the charity can make the best use of its resources.
These were some of the key themes explored in a recent ICAEW Charity Community webinar on better budgeting.
Start with purpose, not the spreadsheet
Budgeting can easily become an annual finance exercise: take last year's numbers, adjust them and circulate the result for approval. A better process starts with what the charity is trying to achieve and the resources needed to deliver it.
In the webinar, Mark Salway described budgeting as a maturity journey. At one end are budgets with limited ownership and accountability, which may bear little relationship to strategy. More mature budgeting gives managers genuine ownership of their numbers and connects resources increasingly closely to strategy and, ultimately, the charity's activities.
This means budgeting should not belong solely to finance. Those closest to fundraising and service delivery will often have the best information on likely income, costs and operational requirements. Finance's role is to provide a clear process, consistent assumptions and appropriate challenge.
Use the right approach for each part of the budget
There is no need to apply the same budgeting methodology to everything. A mixture of top-down and bottom-up, and zero-based and incremental, approaches can work well. Staff costs, for example, might be budgeted centrally where the staffing plan is known. Fundraising teams may be better placed to estimate income from trusts and foundations. A service undergoing significant change may warrant a zero-based approach, questioning what resources are actually required, while established costs might reasonably start with recent expenditure and known changes.
Whatever approach is used, assumptions need to be realistic and visible. A budget should not be made to balance simply by inserting additional fundraising income that those closest to fundraising do not believe is achievable.
Recognise what makes charity budgeting different
Charity budgeting asks not simply ‘can we afford this?’ but also ‘which resources can we use to pay for it?’ Charities need to understand the extent to which restricted income can support the costs associated with the funded activity. Where possible, funding bids should incorporate appropriate cost recovery; otherwise, increasing restricted activity can potentially increase pressure on unrestricted resources. Cash and reserves also need to sit alongside the income and expenditure budget because a lack of cash can threaten a charity's viability.
That makes longer-term thinking important. A deficit is not evidence of a bad budget if trustees deliberately use reserves to invest in services, people or systems. What matters is understanding what that decision means for financial resilience.
Connect money with charitable activity
Perhaps the biggest difference from commercial budgeting is how success is judged, because financial return cannot be the only consideration for a charity. Some activities may generate little or no surplus but be central to the charity's purpose. Conversely, another activity might produce valuable unrestricted income while contributing less directly to charitable impact.
A practical starting point is to align the budget with activities: what does the charity actually do with its resources? Once costs are visible at this level, management and trustees can have a much richer conversation about whether resources are being allocated in line with their priorities. This can also expose activities that require further investment, those that need a more sustainable funding model and, potentially, those that should no longer be prioritised.
Make the difficult choices explicit
If the first draft of a budget shows a funding gap, resist the temptation simply to make income assumptions more optimistic. Instead, revisit assumptions, consider whether contingencies are appropriate and identify the expenditure or investment that matters most. This allows clear decisions about which proposed activities must be deferred unless another source of funding can be found.
Scenario planning can help too. Presenting trustees with a realistic budget alongside a more ambitious stretch scenario makes the underlying choices and risks much more transparent.
Keep the budget alive
Finally, approval should be the beginning rather than the end of the process. Charity income, particularly fundraising, can change quickly. Quarterly reforecasting can help distinguish genuine risks and opportunities from variances created simply because the original budget is out of date.
Ultimately, better budgeting is about better decisions. A useful charity budget establishes ownership and accountability, makes assumptions transparent, reflects restrictions on funding, considers cash and reserves, and shows how resources support the charity's activities. It’s important to do the basics well first, then move towards a budget that connects the money, not just with what the charity spends, but with what it delivers.
